Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.
Are we there yet?
Searching for the bottom of the recession of
2007



Edward (Ned) Hill
Dean, Levin College of Urban Affa...
Slow down in business starts tied to the recession
                      Drop is deeper than in the2001 recession




Sour...
Coming events

1.  Review of forecasts

2.  Indicators of reaching a turning point

3.  Current economic situation

4.  Pe...
World in recession
            o  World Bank:
Forecasts



                o  Global growth is also expected to be negativ...
Forecasts of annual percent change in GDP;
                                   improving over time




Source: The Economis...
Recession over: 6 month percent change in GDP
                       Forecast data from July 2009 on




Source: HIS Globa...
Source: Wall Street Journal Sept 25,   Edward (Ned) Hill   7
2009
World in recession
                                 Recent forecasts of annual percent change in real GDP
Forecasts



   ...
What is the outlook?
            o  Where we were: Liquidity trap, credit crunch
Forecasts



               o  Collateral...
Where we will be: Public policy questions that
            require answers
            o  How big a deficit? How long do y...
Just the facts
Events


         o    Liquidity trap became evident in Summer 2007; November 2007 interbank
              ...
Quarterly Real GDP and 12-month percent change in Quarterly
                                  Real GDP from 1979(1) to 200...
Number of people employed in the economy and the
                                          Unemployment Rate, monthly 1979...
The 4-week moving average of new unemployment insurance claims
                                                           ...
A more localized look at the 4 week moving average
                         of new unemployment insurance claims
Search fo...
12 month percent change in employment in the Temporary
                                  Help industry often shows turning...
Consumer confidence recovery begins
                        Dropping since January 2004; Increase March to June
Search for...
CFO economic confidence
                        Optimism grows among the CFOs
Search for the bottom




                  ...
Monthly Unemployment Rate and Labor Force Participation
                                         Rate 1979 to 2009 Recover...
The educational disadvantage of the unskilled continues to
                             grow and accelerate
              ...
Government Savings as a percent of Gross Domestic Product
                               Current near term deficits are de...
Commercial Paper (CDO) market falls in mid-2007
                                               Nonfinancial scaled on righ...
Discount rate spread in the short term commercial paper
                           market—starting to settle down. Sign of...
The Fed fights systematic risk & becomes the commercial
                                paper market. Signs of recovery in...
Banks: The number of troubled institutions
                                 accelerates in September 2008
Troubled banks &...
Net exports of goods and services, Balance of
                                  Payments Method, $Billions of 2000

      ...
Trade balance is starting to close
Trade in goods and services



                              Billions ($2000)




   So...
Trade weighed value of the dollar reflects its role as a reserve
                         currency—but gravity will reasse...
Dollar increases as a reserve currency against major industrial
                                     currencies; Gains beg...
Dollar in managed decline against Yuan
                                     Drops in value against currencies of industria...
Oil prices peak in June-July 2008 and crash
                       What is the long run equilibrium price?
               ...
Net worth of households and nonprofit corporations lost 20% of value,
                                                    ...
Housing is becoming more leveraged as equity is withdrawn from
                                           houses & houses ...
As home values decline, mortgage liabilities as a percent of house
                                           equity climb...
In Fourth Quarter 2008 Case-Schiller National Home Price Index
                                           declined by 60.1...
Housing prices still declining; Sunbelt hit hardest
                                           Speculative overbuilding in...
New housing starts plummet; slide starts in January 2006
Housing: After effects of a burst bubble




    Source: St. Loui...
Mortgage default rates are climbing
                                           National Average at 4.0%; Florida is at nea...
Manufacturing capacity utilization
                         Struggles to reach 80%
                         Collapses in A...
Auto & light truck sales walk off a cliff;
                       Decline starts in January 2006; accelerates September 20...
Cars and trucks will be made in the United States
                         North America remains a big market
            ...
A tale of 3 clusters: Auto assembly in North America
                       Old domestic heartland; New Domestic center I-...
What’s next:
Realities
o  Automotive work will continue to exist—for those that survive
   this auto depression

o  There ...
Returning to Fundamentals

o  Balancing economic policy
    o  Short run—fight the recession
    o  Long run—fight huge st...
Upcoming SlideShare
Loading in …5
×

Are we there yet? Searching for the bottom of the recession of 2007

573 views

Published on

Only the first 11 slides were presented in the Global Gateway Seminar

  • Be the first to comment

  • Be the first to like this

Are we there yet? Searching for the bottom of the recession of 2007

  1. 1. Are we there yet? Searching for the bottom of the recession of 2007 Edward (Ned) Hill Dean, Levin College of Urban Affairs Cleveland State University September 29, 2009
  2. 2. Slow down in business starts tied to the recession Drop is deeper than in the2001 recession Source: Wall Street Journal, electronic edition, September 28,2009; http://online.wsj.com/article/SB125409527512844979.html Edward (Ned) Hill 2
  3. 3. Coming events 1.  Review of forecasts 2.  Indicators of reaching a turning point 3.  Current economic situation 4.  Performance of critical industries Edward (Ned) Hill 3
  4. 4. World in recession o  World Bank: Forecasts o  Global growth is also expected to be negative in 2009, with an expected 2.9% contraction in global GDP o  Global GDP growth is expected to rebound to 2.0% in 2010 and 3.2% by 2011 o  N. America leads industrial world's recovery o  Recovery starts in 2009 Q3 (July-September) o  Europe - deeper recession than North America, about 1% point lower o  BRIC - growth rates slow (Brazil negative) o  Japan - back to economic stupor o  Recovery in employment growth will lag. In the US: o  1990 recession 9 months long: employment recovered in 32 months o  2001 recession 9 months long: employment recovered in 48 months o  We are in month 19 of the 2007 recession & will it will last for last 22-24 months. When will employment be fully recovered? A guess is 5 years or 60 months. Edward (Ned) Hill 4
  5. 5. Forecasts of annual percent change in GDP; improving over time Source: The Economist, electronic edition, retrieved September 7, 2009 from http://www.economist.com/markets/ Edward (Ned) Hill 5 indicators/displaystory.cfm?story_id=14365843
  6. 6. Recession over: 6 month percent change in GDP Forecast data from July 2009 on Source: HIS Global Insight and USA Today Edward (Ned) Hill 6
  7. 7. Source: Wall Street Journal Sept 25, Edward (Ned) Hill 7 2009
  8. 8. World in recession Recent forecasts of annual percent change in real GDP Forecasts United States Sources: The Conference Board; The Economist; OECD, Economic Outlook, Interim Report; Survey of Professional Forecasters, Philadelphia Federal Edward (Ned) Hill Reserve Bank; International Monetary Fund, World Economic Outlook; European Union, Economic Forecast; World Bank Global Development Finance 8 World Book, 2009
  9. 9. What is the outlook? o  Where we were: Liquidity trap, credit crunch Forecasts o  Collateralized debt obligations (CDOs)—mortgage, consumer credit, autos, student o  Commercial Paper Market o  Interbank lending, and calls on bank capital o  Credit Default Swaps (CDS aka: insurance) became the chips at a casino o  Where we are: Macroeconomic problems affect core domestic sectors o  Finance o  Automobile assembly o  Housing related: Construction and building materials, Furniture, Logistics o  Retail--consumer spending o  Education Edward (Ned) Hill 9
  10. 10. Where we will be: Public policy questions that require answers o  How big a deficit? How long do you run a deficit? Forecasts o  Energy—regulate to a goal or create market incentives? o  How do you regulate? o  Financial transparency or accounting standards? o  Can we monitor behaviors to rebuild credit culture & savings culture? o  Banking and moral hazard: What is a bank? Financial markets are governed by a balance between greed and fear. How do we put fear of failure back in? o  How do you regulate the shadow financial system and ensure transparency o  Automobiles and fuel prices? Do you regulate by constraining choices or by increasing the price of oil used in motor fuel by increasing the motor fuels tax? Do you use the revenue to support general transportation infrastructure investments? o  When will we increase federal taxes to address the long- term structural deficit? Edward (Ned) Hill 10
  11. 11. Just the facts Events o  Liquidity trap became evident in Summer 2007; November 2007 interbank lending slows o  NBER—the recession started in December 2007 (Declared in November 28, 2008) o  September 2008 acceleration of bad news and September 15 look into the abyss of frozen credit markets o  Sept 15 Bank of America announces intent purchase Merrill Lynch o  Sept 15 Lehman files for Chapter 11 bankruptcy o  Sept 16 Reserve Primary Fund breaks the buck o  Sept 16 The Fed advances $85 billion to AIG o  Sept 17 SEC bans short selling ban of financial sector stocks o  49 out of 50 states are in recession (Alaska benefits from oil prices and extraction taxes) o  End of the housing bubble removed $3.5 trillion in household wealth from 2006 (4) to 2008(4). o  Net worth of households dropped by 20% in 18 months 2007(2) to 2008(4) or $12.9 trillion o  Every $1 lost consumer wealth decreases spending by 5 cents over the next two years ($322.1 billion per year) Edward (Ned) Hill 11
  12. 12. Quarterly Real GDP and 12-month percent change in Quarterly Real GDP from 1979(1) to 2008(4) General performance Real GDP in Billions of $2000 12-month percent change in Real GDP Real GDP in billions of $2000 12-month Percent Change Source: US Bureau of Economic Analysis, National Income and Quarterly data, last data point first Product Accounts, Retrieved June 27, 2009 from FRED, St Louis Edward (Ned) Hill quarter of 2009 12 Federal Reserve Bank. Released June 25,2009. Recessions are shaded.
  13. 13. Number of people employed in the economy and the Unemployment Rate, monthly 1979 to 2009 General Performance Number of Jobs Unemployment Rate Number Employed (000) Unemployment Rate Source: US Bureau of Labor Statistics, Current Population Survey, retrieved from FRED, St Louis Federal Reserve Bank, July 5, 2009. Edward (Ned) Hill 13 Recessions are shaded
  14. 14. The 4-week moving average of new unemployment insurance claims usually trends down at the end of recessions—this is encouraging Search for the bottom 4 week average of number of claims Source: Bureau of Labor Statistics, Unemployment Insurance Weekly Claims Retrieved July 5, 2009 from FRED, St Louis Edward (Ned) Hill 14 Federal Reserve Bank .
  15. 15. A more localized look at the 4 week moving average of new unemployment insurance claims Search for the bottom Peak: April 4, 2009 Source: Bureau of Labor Statistics, Unemployment Insurance Weekly Claims Retrieved July 5, 2009 from FRED, St Louis Edward (Ned) Hill 15 Federal Reserve Bank .
  16. 16. 12 month percent change in employment in the Temporary Help industry often shows turning points Conclusion: We haven’t turned yet; could be at bottom Search for the bottom Temporary Help Services Dec 2005 Total Employment 12 month % change Manufacturing June 2008 -27.0% Source: US Bureau of Labor Statistics, Current Employment Monthly data, not seasonally adjusted Statistics, retrieved July 5, 2009; Edward (Ned) Hill Last data point June 2009 16 Recessions are shaded: July 1990-March 1991; March 2001- November 2001; December 2007
  17. 17. Consumer confidence recovery begins Dropping since January 2004; Increase March to June Search for the bottom Source: St. Louis Federal Reserve Bank, FRED, from University of 1966(1)=100 Michigan, Edward (Ned) Hill Monthly data 01/90 to 05/09 17 http://research.stlouisfed.org/fred2/series/UMCSENT/downloaddata? Recessions are shaded cid=98retrieved July 11,2009
  18. 18. CFO economic confidence Optimism grows among the CFOs Search for the bottom The latest quarterly poll of over 1,000 CFOs, conducted in late February by Duke University in America, Tilburg University in the Netherlands and CFO, a sister publication to The Economist. Source: The Economist, June 24, 2009 from May 21, 2009 Edward (Ned) Hill 18
  19. 19. Monthly Unemployment Rate and Labor Force Participation Rate 1979 to 2009 Recovery will be slow Consequences: Labor market Labor Force Participation Rate Labor Force Participation Rate Unemployment Rate % Unemployment Rate Source: US Bureau of Labor Statistics, Current Population Survey retrieved from FRED, St Louis Federal Reserve Bank, July 5, 2009 Edward (Ned) Hill 19 Recessions are shaded.
  20. 20. The educational disadvantage of the unskilled continues to grow and accelerate (Difference in Unemployment Rates from those with BAs and above) Consequences: Labor market Source: US Bureau of Labor Statistics, Current Population Survey retrieved from FRED, St Louis Federal Reserve Bank, July 5, 2009 Edward (Ned) Hill 20 Recessions are shaded.
  21. 21. Government Savings as a percent of Gross Domestic Product Current near term deficits are defensible; long term prospects are troubling, Quarterly data 1947 to 2009(1) Consequence: Federal Deficit estimate Source: Net Federal Government Savings and Gross National Recessions are shaded quarters Product by Quarter from the National Income and Product Edward (Ned) Hill 21 Accounts, Bureau of Economic Analysis, Retrieved from FRED, Federal Reserve Bank of St. Louis on July 6,2009
  22. 22. Commercial Paper (CDO) market falls in mid-2007 Nonfinancial scaled on right side; Financial and Asset-backed on left Markets: Commercial paper Nonfinancial Commercial Paper Asset -backed and Financial Commercial Paper Source: Board of Governors of the Federal Reserve System, Collateralized Debt Obligation CDO download June 23, 2009 http://www.federalreserve.gov/ Edward (Ned) Hill 22 releases/CP
  23. 23. Discount rate spread in the short term commercial paper market—starting to settle down. Sign of recovery Market: Commercial Paper Spreads jump in 2008(3) with market freeze signs of credit problems in commercial paper market 2007(3) Source: Board of Governors of the Federal Reserve System, Data are daily rates from June 2001 to download June 23, 2009 http://www.federalreserve.gov/releases/ Edward (Ned) Hill 23 mid-2009 CP/#1
  24. 24. The Fed fights systematic risk & becomes the commercial paper market. Signs of recovery in the credit markets Composition of the Fed’s assets, weekly, from January 2007 to July1, 2009 in millions of dollars Assets of the Federal Reserve Traditional Fed security holdings Source: Cleveland Federal Reserve Bank, Weekly data January 2007 to July 1, 2009 http://www.clevelandfed.org/research/data/ Edward (Ned) Hill Red line is the week of September 15, 2008 24 credit_easing/index.cfm retrieved July 6,2009
  25. 25. Banks: The number of troubled institutions accelerates in September 2008 Troubled banks & bank assets Number of problem banks increases by o  47% from 2008(3) to 2008(4) o  232% from 2007(4) to 2008(4) Troubled assets grow by o  37% from 2008(3) to 2008(4) o  623% from 2007(4) to 2008(4) Source: FDIC, released February 26, 2009. Retrieved March 22, 20009 from FDIC Graph Book. http://www2.fdic.gov/qbp/toc.asp? Edward (Ned) Hill 25 rptdate=/qbp/2008dec&htmfile=alltoc.html#AIS
  26. 26. Net exports of goods and services, Balance of Payments Method, $Billions of 2000 Billions ($2000) Source: National Income and Product Accounts, Table 1.1.6 Real Gross Domestic Product, Chained Edward (Ned) Hill 26 Dollars, Retrieved July 11,2009
  27. 27. Trade balance is starting to close Trade in goods and services Billions ($2000) Source: National Income and Product Accounts, Table 1.1.6 Real Gross Domestic Product, Chained Edward (Ned) Hill 27 Dollars, Retrieved July 11,2009
  28. 28. Trade weighed value of the dollar reflects its role as a reserve currency—but gravity will reassert itself due to trade Credit markets Peak Feb 2002 Value of the dollar China floats Yuan freeze 129.5 Sept 15 2007 Feb 2009 111.8 Bottom July 2008 95.4 Source: St Louis Federal Reserve Bank, FRED, retrieved July 6, 2009 Edward (Ned) Hill 28
  29. 29. Dollar increases as a reserve currency against major industrial currencies; Gains begin to moderate in 2009 Credit markets freeze Value of the dollar $ increases in value $ decreases in value Source: St Louis Federal Reserve Bank, FRED, Monthly data Jan 1999 to June 2009; Indexed to retrieved July 6, 2009 Edward (Ned) Hill relative values in January 199 when Euro was 29 floated
  30. 30. Dollar in managed decline against Yuan Drops in value against currencies of industrializing nations Credit markets China floats Yuan freeze Value of the dollar $ increases in value $ decreases in value Source: St Louis Federal Reserve Bank, FRED, Monthly data Jan 1999 to June 2009; Indexed to retrieved July 6, 2009 Edward (Ned) Hill relative values in January 199 when Euro was 30 floated
  31. 31. Oil prices peak in June-July 2008 and crash What is the long run equilibrium price? Price of West Texas Intermediate, Closing price on 1st of the month Oil price volatility June 2008 $133.93 March 2009 $47.98 Oil peak in July 2008 at $147. Bottoms in Source: St. Louis Federal Reserve Bank, FRED, http:// research.stlouisfed.org/fred2/series/OILPRICE retrieved July 6, Edward (Ned) Hill February at $39.16. Close July 3, 2009 31 2009 $66.73
  32. 32. Net worth of households and nonprofit corporations lost 20% of value, or $13.9 trillion, in 2 years from 2007(2) to 2009(1). Home equity drops dramatically Personal Wealth: After effects of asset bubbles imploding Peak: 2007(2) at $64.4 trillion Households & Nonprofit organizations lost 21.6% of their net work from the peak value in 2007(2) to Home Equity ($millions) Net Worth ($millions) 2009(1) from $64.3 trillion to $50.4 trillion 2008(4) at $51.5 trillion Households lost 40.8% of their equity in real estate from peak 2005(4) to 2009 (1) from $12.5 trillion to $7.4 trillion. A loss of $5.1 trillion. Net worth expressed in millions of current dollars Source: Board of Governors of the Federal Reserve Quarterly 1990(1) to 2009(1) System, Flow of funds Tables, Z1, retrieved July Edward (Ned) Hill 32 6,2009. Variables FL152090005.Q and FL155035065.Q
  33. 33. Housing is becoming more leveraged as equity is withdrawn from houses & houses fall in value. The slide began in 2005(3) The ratio of home equity to replacement value Housing: After effects of a burst bubble 2005(3) Source: Board of Governors of the Federal Reserve System, Quarterly 1990(1) to 2009(1) Flow of funds Tables, Z1, retrieved July 6,2009 Edward (Ned) Hill 33 Variables FL155012603.Q and FL155035065.Q
  34. 34. As home values decline, mortgage liabilities as a percent of house equity climbs. Involuntary leveraging. Quarterly 2002(4) 2008(4) Housing: After effects of a burst bubble 141% 70% Source: Board of Governors of the Federal Reserve System, Note: Equity is for Households, while Home Flow of funds Tables, Z1, retrieved July 6,2009 Edward (Ned) Hill mortgages are held by households and 34 Variables FL155035065.Q and FL153165105.Q Nonprofit organizations
  35. 35. In Fourth Quarter 2008 Case-Schiller National Home Price Index declined by 60.1 points, lost 65% of its gain from 2000 Housing: After effects of a burst bubble Peak 2006(1) 189.93 2009(1): 129.76 Source: Standard & Poor’s Case-Schiller Home Price Index 2009(1) Base value = January 2000 35 www.homeprice.standardandpoors.com retrieved July 5,2009 Edward (Ned) Hill
  36. 36. Housing prices still declining; Sunbelt hit hardest Speculative overbuilding in Sunbelt; Low demand in Frostbelt Housing: After effects of a burst bubble Source: Standard & Poor’s Case-Schiller Index, April 2009 data Edward (Ned) Hill 36 www.homeprice.standardandpoors.com retrieved July 5,2009
  37. 37. New housing starts plummet; slide starts in January 2006 Housing: After effects of a burst bubble Source: St. Louis Federal Reserve Bank, FRED, Monthly data 1/79 to 5/09 http://research.stlouisfed.org/fred2/series/HOUST/ Edward (Ned) Hill 37 downloaddata?cid=97Retrieved July 6,2009
  38. 38. Mortgage default rates are climbing National Average at 4.0%; Florida is at nearly 12% Housing: After effects of a burst bubble First quarter 2009 Source: TransUnion, http://transunion.mediaroom.com/index.php?s=98 retrieved Edward (Ned) Hill 38 June 23,2009
  39. 39. Manufacturing capacity utilization Struggles to reach 80% Collapses in August 2007 when the liquidity trap began Manufacturing Source: Federal Reserve Bank of St Louis, FRED, from US Monthly Jan,1979 to May 2009 Bureau of Economic Analysis, retrieved July 6,2009 Edward (Ned) Hill Recessions are shaded 39
  40. 40. Auto & light truck sales walk off a cliff; Decline starts in January 2006; accelerates September 2007; falls apart September 15, 2008 Annualized monthly car & light truck sale Autos & light trucks 1/2006 9/2007 9/2008 Feb 27, 2009 ... Based on current market assumptions, Ward’s forecasts each of the Old Domestics will end 2009 with utilization rates below 50%. 40 Source: St. Louis Federal Reserve Bank, FRED, from US Monthly 01/97 to 05/09 Bureau of Economic Analysis , retrieved July 6, 2009 Edward (Ned) Hill
  41. 41. Cars and trucks will be made in the United States North America remains a big market US production numbers drop; Mexico climbs Autos & light trucks Source: International Organization of Automobile Manufactures (OICA) http://oica.net/category/production-statistics/2007- Edward (Ned) Hill 41 statistics/ retried July 1, 2009
  42. 42. A tale of 3 clusters: Auto assembly in North America Old domestic heartland; New Domestic center I-70 – I-75 crosshair; Southeast Corridor Autos & light trucks Source: Ohio Department of Development, Office of Strategic Research Edward (Ned) Hill 42
  43. 43. What’s next: Realities o  Automotive work will continue to exist—for those that survive this auto depression o  There will be a different set of impacts for communities anchored by an assembly plant and those with parts manufactures o  Just-in-time, fuel costs, and congestion will continue to re- concentrate the industry o  Keys to survival for companies and plants o  Flexible workforce and flexible work rules o  Company & supply chain culture will continue to be important o  No debt—leverage is now the company killer o  Long term value of the dollar will influence the health of assembly clusters Edward (Ned)Hill Edward (Ned) Hill 43
  44. 44. Returning to Fundamentals o  Balancing economic policy o  Short run—fight the recession o  Long run—fight huge structural deficits o  Return to credit culture—both for individuals & banks o  Financial regulation for transparency and monitoring of behaviors; not micromanaging accounting o  Erosion of too big to fail and a move to workout banks o  Dollar will fall again—economic physics will reassert itself Edward (Ned) Hill 44

×